Smart Spending

Banks Increase Auto Lending to Consumers

According to the Wall Street Journal, banks and lenders who remain reluctant to offer mortgages and other types of credit to consumers are becoming much more lenient in making on particular type of loans: auto loans. In fact, the Journal indicates that banks increase auto lending to consumers by easing auto loan standards considerably.  Moreover, there has been a significant rebound in the market for securities that are backed by car-loans.

The rebound has been prompted by the fact that car loans have a shorter repayment period and that people are more likely to stop making house payments than car payments because repossession of a car is faster and easier than foreclosure. Regardless of the reason for the rebound, however, the increase in easy access to auto loans has also prompted a boom in car buying.

Taking Advantage of a Bank’s Increased Auto Lending

If you are in need of a new car, now may be the time to act given the favorable lending conditions. However, it is important to realize that banks are out to make a profit with all loans they issue- including these car loans- and that what is in the best interests of the bank may not be in your best interests. In fact, as the Wall Street Journal article reports, borrowers are often taking out loans that they have to stretch to repay, and these same borrowers are making the loan term last longer to create lower monthly payments so they can buy cars that they might otherwise not be able to afford.

Just because some borrowers are doing this, however, doesn’t mean you have to fall into the trap. You can take advantage of the banks willingness to lend and you can do so in a financially smart way by doing the following:

  • Determine first how much you can reasonably afford to pay for a vehicle. You don’t want to borrow the maximum that a bank will lend if that forces you to stretch your monthly budget. Instead, decide what you believe is reasonable to borrow for a car and what a comfortable monthly payment is and make a commitment not to borrow more than this amount.
  • Shop around for a car loan before going to the dealer. Many people opt for dealer financing because it is easy and convenient, but this is often a major error since you may be charged a higher interest rate or additional fees and costs for a loan from a dealer. Instead, shop around with local banks and credit unions to find out what type of loan they will offer you.
  • Find a vehicle within your budget. You do not have to buy a brand new vehicle in order to take advantage of lenders’ increased willingness to offer auto loans. Instead, in many cases it is a smarter choice to find a reliable used vehicle that is still under warranty or that is a certified pre-owned vehicle that comes with a dealer warranty.

By following these tips and shopping smartly both for a new car and for a new car loan, you can make the most informed choice possible and benefit as banks increase auto lending to consumers.